The headline, ‘The Slowdown Starts, with Regional Speed Bumps,’ makes clear the theme of June’s report, which notes that aggressive monetary tightening has started to make itself felt. The key issue here, Thornton and co-writer Xianfang Ren suggest, is whether the central government will press on as the central bank 'enforces strict lending quotas and tries to clamp down on off-balance-sheet activities,' or whether it will ‘slowly turn its attention to growth preservation.’

As Minxin Pei noted in an opinion piece for us last month, spiraling inflation is a key concern for Chinese policy makers worried about its potential to spark social instability. How? As Pei notes:

‘The political dynamics of social protest change dramatically when inflation is high and keeps rising. The critical political function performed by inflation is coordination—high inflation sends out a signal to many disparate groups, each of which are unhappy with the status quo for different reasons and at different times. Galloping inflation makes such groups unhappy at the same time. The result is easy to imagine: when inflation is higher, social disturbances can grow larger, attract different groups, and become more intense.’

Inflation in April did actually ease, with the annual inflation rate falling to 5.3 percent from a year earlier, down from a three-year high of 5.4 percent in March. Food price inflation has been of particular concern, and remained high in April, increasing at an annual rate of 11.2 percent, although this figure also marked a slowing from a March high of 11.7 percent.

So, how will the government respond? Thornton and Ren argue:

‘The government remains in wait-and-see mode: should aggressive tightening throttle too much growth, monetary policy will be loosened, and credit conditions may enable even more investment growth…it stands, though, inflation remains the key policy priority, but it is not hard to see the switch flipping to growth preservation.’